By Rob DeHollander
I have a junior in high school and we have been visiting colleges. Part of the visit includes a session on financial aid. For many families, financial aid programs help make higher education attainable. The first step in applying for aid is to complete the Free Application for Federal Student Aid. It is used to determine the student’s eligibility for federal aid programs, such as grants, work-study options, and loans. Schools also use the FAFSA to assess whether additional aid is available from an applicant’s state of residence and from the school itself.
The FAFSA will ask for personal information, including marital status, tax and income information, household size, and the schools the student will apply to. It also asks for details about the income, assets, and education history of the applicant’s parents.
Tips for navigating the income-related questions
The role of tax returns. Information from the student’s and parents’ tax returns is used to complete the FAFSA’s income-related questions. There is a two-year look back regarding the data required.
Whose data should be used? When parents live apart and are divorced or separated, factors must be evaluated to determine which parent’s information must be provided. Such factors include custody, which parent the student lived with most, or which parent provided the most financial support to the student during the 12 months preceding the date that the FAFSA is to be filed.
For situations where the custodial parent has remarried, the stepparent’s information must also be included on the FAFSA. If the student’s parents are divorced, are separated, or were never married BUT they live together, both are required to provide information on the FAFSA.
Determining the expected family contribution
One reason the FAFSA requires so much detailed information is that the data is used to calculate each student’s expected family contribution (EFC). It is a measure that determines how much federal aid a family may receive.
The formula for determining an EFC considers parental assets and income, student assets and income, and factors such as the number of family members attending college at the same time.
- Parental assets. The questions that the FAFSA asks about parental assets pertain to ownership interest at the time the application is completed. Reportable parental assets include cash and funds held in bank accounts, trust funds, 529 accounts, and more. Parental assets are considered low-impact assets for financial aid purposes — only up to 5.64% of the value of parental assets affect the EFC.
- Student assets. Student assets include property in which the student has an ownership interest at the time that the FAFSA is completed. Student assets are considered high-impact assets for financial aid purposes — up to 20% of the value of his or her assets will affect the EFC.
- Protected assets. Some assets are protected and don’t need to be listed on the FAFSA, including 401(k) plans, pension plans, 403(b) plans, IRAs, and other retirement plans. Equity in a family’s primary residence, certain family owned businesses and farms, life insurance, annuities, and personal possessions are also nonreportable.
If your children are approaching college age, it may be helpful to get an estimate of your family’s EFC. The U.S. Department of Education’s FAFSA4caster is a free calculator that estimates financial aid eligibility.
Grandparent-owned 529 plans
Funds in a grandparent-owned 529 plan are not considered countable assets on the FAFSA, but money that’s taken out of the 529 plan and used to pay for education expenses is considered nontaxable income to the student. Distributions from a grandparent-owned 529 plan reduce the eligibility of a student for need-based aid by as much as 50 percent of the amount of the distribution. If grandparents own a 529 plan for the benefit of their grandchild, the family may want to reserve those funds for the last two years of college because FAFSA uses the prior-prior year’s tax return to complete the income questions.
Resources for completing the FAFSA
Two resources for completing the FAFSA are the notes section at the end of the FAFSA itself and the Federal Student Aid website.
A college education is one of the best investments you can make for your child, but make sure you do your homework. Before making any decisions, a best practice is to consult your financial adviser and tax professional.
Robert DeHollander is a managing partner and co-founder of the DeHollander & Janse Financial Group in Greenville.